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1 econstor Make Your Publications Visible. A Service of Wirtschaft Centre zbwleibniz-informationszentrum Economics Friedman, Jed Working Paper How responsive is poverty to growth? A regional analysis of poverty, inequality, and growth in Indonesia, WIDER Discussion Papers // World Institute for Development Economics (UNU-WIDER), No. 2003/57 Provided in Cooperation with: United Nations University (UNU), World Institute for Development Economics Research (WIDER) Suggested Citation: Friedman, Jed (2003) : How responsive is poverty to growth? A regional analysis of poverty, inequality, and growth in Indonesia, , WIDER Discussion Papers // World Institute for Development Economics (UNU-WIDER), No. 2003/57, UNU-WIDER, Helsinki This Version is available at: Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

2 Discussion Paper No. 2003/57 How Responsive is Poverty to Growth? A Regional Analysis of Poverty, Inequality, and Growth in Indonesia, Jed Friedman * August 2003 Abstract This paper uses six nationally representative household consumption surveys to develop successive poverty profiles for Indonesia over a fifteen-year period of sustained high growth followed by rapid contraction. Adopting a cost-of-basic-needs approach to poverty determination (an approach particularly suited to measures of absolute poverty), this paper develops price indices and calculates poverty lines from unit value data, an oft neglected source of information. The summary findings confirm that Indonesia has witnessed broadbased gains in poverty reduction over the period and then a dramatic reversal during the recent financial crisis. These summary findings, however, mask substantial diversity in growth, inequality, and poverty change across Indonesian regions and so subsequent analysis focuses on the links between growth, inequality, and changes in poverty at the regional level. As opposed to previous studies of poverty change that have used short panels of cross-national data to identify the relationship between growth and poverty, this study employs a longer panel for a single country.../... Keywords: poverty, growth, inequality, Indonesia. JEL classification: I32, O12, O53, R11 Copyright UNU/WIDER 2003 *Development Research Group, The World Bank Group. This study has been prepared within the UNU/WIDER project on Spatial Disparities in Human Development, directed by Ravi Kanbur and Tony Venables. UNU/WIDER gratefully acknowledges the financial contribution to the project by the Government of Sweden (Swedish International Development Cooperation Agency Sida).

3 in order to investigate how poverty change at the provincial level varies with province growth rates and province changes in inequality (while controlling for time invariant province characteristics). The results indicate that poverty change is highly responsive to overall growth. However closer analysis reveals that regional differences in poverty levels persist even after controlling for the effects of provincial income levels, particularly for rural areas. These findings suggest that local factors play an important role in poverty determination and may interact with growth to impact poverty reduction in differing ways across Indonesia. Future investigations will need to take a more careful look at these local determinants of poverty change and attempt to identify the types of growth toward which poverty measures are particularly responsive. Acknowledgements Many thanks are due James Levinsohn, David Lam, and Jan Svejnar for their invaluable advice and assistance. An anonymous referee supplied very useful direction. Culpability for all remaining errors accrues solely to the author The World Institute for Development Economics Research (WIDER) was established by the United Nations University (UNU) as its first research and training centre and started work in Helsinki, Finland in The Institute undertakes applied research and policy analysis on structural changes affecting the developing and transitional economies, provides a forum for the advocacy of policies leading to robust, equitable and environmentally sustainable growth, and promotes capacity strengthening and training in the field of economic and social policy making. Work is carried out by staff researchers and visiting scholars in Helsinki and through networks of collabourating scholars and institutions around the world. publications@wider.unu.edu UNU World Institute for Development Economics Research (UNU/WIDER) Katajanokanlaituri 6 B, Helsinki, Finland Camera-ready typescript prepared by Lorraine Telfer-Taivainen at UNU/WIDER Printed at UNU/WIDER, Helsinki The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of any of the views expressed. ISSN ISBN (printed publication) ISBN (internet publication)

4 1 Introduction Events such as the 1997 Asian currency crisis have focused much popular attention on increasing global integration and its consequences for the world s poor. Both sides of the debate, the pro- and anti-globalizers, promote their development strategies as pro-poor and look to recent history to support their views. This uncertainty surrounding the potential impacts of globalization on the world s poorest households has motivated several recent studies to re-examine the relationship between global integration and economic growth on the one hand and economic growth and poverty reduction on the other.1 This paper will offer further evidence on the second question by documenting changes in poverty in Indonesia over the period and then relating the observed changes to income growth and changes in inequality. Most studies that explore the poverty reduction growth relationship have utilized a short panel of country-level data to estimate a mean response of a particular poverty measure to population wide gains in income. These studies have indeed typically shown that national poverty change is fairly responsive to national economic growth. For example Dollar and Kraay (forthcoming) find that, on average, a 1 per cent gain in mean income is associated with a 1 per cent gain in income among households in the bottom quintile. If accepted at face value, the summary estimates of poverty responses to growth convey a sense of how much growth is needed to reduce poverty to low levels. Additionally, if poverty change is largely determined by growth, then the question concerning the effects of globalization on the poor largely becomes a question concerning the effects of globalization on growth. However just as there may very well be no single effect of global integration on economic growth growth in turn may impact the poor in different ways. These impacts can vary on a national and regional basis as well as across time due to such factors as differing initial economic conditions or differing government policy choices. The use of summary national measures necessarily ignores the potential heterogeneity in the growth poverty relationship that may exist across countries and also exist even within a country, especially a large country with imperfectly integrated regional economies such as Indonesia. This paper will revisit the poverty growth relationship but this time with a long panel of information (six repeated cross sections over the period ) for one country and investigate how poverty change at the provincial level varies with province growth rates and province changes in inequality (while importantly controlling for time invariant provincial 1 See for example Ben-David (1993), Sachs and Warner (1995), Edwards (1998), and Rodriguez and Rodrik (1999) that explore the former question and Bruno et al. (1998), Dollar and Kraay (2000), and Ravallion (2001) that explore the latter. 1

5 characteristics). A necessary first step in this process involves the generation of successive regional poverty profiles with which to document, as carefully as possible, long-run changes in poverty. This is the first aim of this paper. The definition of poverty adopted for analysis here follows a cost-of-basic-needs approach and as such is particularly suited to measures of absolute poverty and deprivation. Typical studies of this kind need information on the prices of basic consumption commodities in order to determine a poverty line. When price information is lacking, researchers must often turn towards other definitions of poverty. Although the consumption data used here does not contain price information, it does enable computations of a price proxy, the unit value, which is simply the household s total expenditure on a given good divided by the total quantity consumed. Utilizing a simple structural model of consumer choice, this paper argues that unit values can indeed serve as good proxies for prices. The main body of the paper presents a regional analysis of poverty responses to overall economic growth. This regional focus avoids three difficulties associated with the aforementioned national-level studies. The first difficulty concerns data comparability. Typically cross-national studies employ secondary datasets that by necessity are comprised of measures derived from underlying primary data of differing design and quality. For example, poverty measures for a particular country can be estimated from either income or consumption surveys, depending on the type of data available. Atkinson and Brandolini (1999) explore various shortcomings with secondary data and identify several measurement concerns when utilizing national-level data collected from heterogeneous sources. By using the repeated cross-sections of a household consumption survey as a uniform data source, this study avoids the pitfalls of measurement heterogeneity often found in secondary data. The cross-national studies are able to control for time invariant country-level characteristics that may influence the poverty growth relation. However, the potential existence of timevarying national-level variables that affect poverty and also are related to economic growth presents a second difficulty. One example of such a time-varying national-level variable is a national pro-poor welfare policy enabled by high growth. The failure to control for these unobserved variables may bias estimates of the poverty growth relationship. By looking within a country, this study de facto controls for such national-level factors. The final difficulty with these studies derives from the simple observation that the poor do not constitute a homogenous group but rather differ substantially along dimensions such as region and urban/rural location. The national scope of previous studies obscures important heterogeneity among the poor and the failure to account for such heterogeneity may limit the applicability of the results. Friedman and Levinsohn (2002) find that the consumption impacts of the Indonesian crisis for poor households were dramatically different depending on whether the poor lived in cities or in the country as well as which particular region of the country. By 2

6 looking at poverty variations within a single country, this study will more carefully account for such heterogeneity. From a policy perspective, however, the conclusion that growth is good for the poor (or a particular group among the poor) is not especially illuminating. Most economists would expect some benefits of overall growth to accrue to the poor. A more useful question from the policy perspective might instead be posed as: which types of growth are better for the poor? This is a more difficult question to answer. However for this question, it is possible to push the data a little harder and look at how poverty responds to growth in different regions across Indonesia. A priori, it is quite possible that poverty differentially responds to the differing sources and structures of growth that can exist across provinces.2 This paper finds some evidence to support this view. Regional differences in poverty persist even after controlling for the effects of provincial income and inequality levels. Given these findings, future studies need to take a more careful look at these local determinants of poverty and attempt to identify the sources and structures of growth towards which poverty measures are particularly responsive. The remainder of the paper is structured as follows: the next section describes the data used in the study, summarizes the methods of poverty determination, and presents the estimated poverty trends in Indonesia over the period at both the national and regional level. Section 3 documents the degree of regional variation in growth and inequality change present in the data, examines the relation between poverty reduction and economic growth in a regression context, and explores regional heterogeneity in this relationship. Section 4 concludes. An appendix then explains the methods of poverty line determination adopted herein. 2 Data and methods The poverty measurements used in this study are derived from Indonesian household consumption and demographic data. This information is provided by six successive waves of the Indonesian National Socioeconomic Survey known by its Indonesian acronym SUSENAS which is is an annual survey that includes a detailed consumption component every three years. This study utilizes the 1984, 1987, 1990, 1993, 1996, and 1999 consumption components. Every SUSENAS surveys thousands of households from each of Indonesia s 27 provinces (for a total sample size of 50,000 to 60,000 households, depending on the survey 2 In the case of India, Ravallion and Datt (2002) find that the degree of poverty reduction associated with gains in non-farm output varies across provinces. 3

7 year).3 Population weights enable representative analysis at the provincial level and, unless otherwise noted, are used in the analysis to follow.4 SUSENAS gathers household consumption data at a fairly detailed level, especially for food items. For example, the 1996 SUSENAS records the total weekly consumption and expenditure for 217 individual foods such as tomatoes or rice (actually four different varieties of rice are included in the survey). The consumption component contains a large core of important individual consumption items that are recorded in every survey year, thus enabling a consistent comparison of consumption across time. SUSENAS is also fielded in January or February of each year to ensure that intertemporal comparisons are not confounded by seasonal variation in household income and consumption. For self-produced food items, SUSENAS interviewers are trained to impute the value of such consumption based on prevailing local prices. The survey itself does not report direct price observations. However a price proxy, the unit value, can be computed by dividing total household expenditures on a particular food by total quantity consumed. These unit values play an important role in determining the poverty lines used later in the analysis.5 Table 1 gives an overview of the six SUSENAS surveys as well as some simple summary statistics. The general trend in urbanization in Indonesia is quite apparent. The percentage of rural households in the total sample declines from 78 per cent to 61 per cent over the 15-year period. Table 1 also reports mean per capita household expenditures in 1984 rupiahs. It is important to note that the deflators used in this study are not the standard deflators derived from official price data but rather a food-only price deflator derived from the household consumption information in SUSENAS.6 This deflator is a welfare consistent measure in that it represents the cost of a predetermined, culturally appropriate, and adequately nutritious basket of food goods. These issues will be explored further when we discuss poverty line determination methods but we note here that the cost of this basket is one of the poverty lines adopted by this study. 3 Due to the unclear sampling frame of the data from the contested province of East Timor (urban areas were not surveyed) this province is dropped from subsequent analysis. 4 From 1993 on, the SUSENAS sampling frame was modified to enable representative analysis at the Regency (Kabupaten) level, one administrative level lower than province. To remain consistent with the pre-1993 period, this study will use the province as the sole geographic unit. 5 SUSENAS also collects expenditure information for approximately 100 non-food goods and aggregate goods such as electricity or male apparel. Also included are expenditures on festivities and ceremonies as well as taxes and insurance. Due to the aggregate nature of most of these non-food categories, SUSENAS does not record the quantities of the goods consumed. As such, and unlike food goods, researchers are unable to impute unit values for these goods. 6 This price deflator is a democratic deflator in the spirit of Prais (1959) in that it gives greater weight (indeed total weight) to the most basic necessities, in this case food. 4

8 Table 1: Summary characteristics of the SUSENAS survey, Characteristics Year Total Urban Rural Proportion rural households Per capita m onthly expenditures (1984 Rupiahs)* Food share of total expenditures Unweighted # of households Unweighted # of individuals Note: *As determined from a food price deflator estimated from SUSENAS. Source: Author s calculations from SUSENAS surveys, various rounds. Over the period , changes in Indonesian food prices tracked quite closely with overall inflation and so the food deflator here yields real income changes consistent with other studies of income change (Biro Pusat Statistik 1997). Household welfare, as measured by either the mean real per capita monthly household expenditure or by the average share of food expenditures, shows clear gains over the period of sustained national growth. Real mean per capita household expenditure (in 1984 rupiahs) increases from 17,300 rupiahs/person/month in 1984 to 26,300 in Gains of similar magnitude are found in both urban and rural areas. 5

9 As a result of the financial crisis and the lifting of price controls in late 1997, Indonesia experienced a prolonged period of high inflation where food prices rose even more rapidly than non-food prices. Because of this, the food deflator over the period will overstate overall inflation and the decline in real per capital expenditure when compared with the deflators used in most other studies of the post-crisis impacts. Table 1 reveals a 28 per cent decline in mean per capita expenditure from 26,260 to 19, rupiahs per person per month. This decline stands in comparison to a 17 per cent decline over the same period when consumption change is measured with a general price index (Suryahadi et al. 2000). We will not adjust our deflators so that they correspond with more commonly used ones since we are primarily concerned with the poverty growth relationship and the approach should not lead to biases in the multivariate analysis to come once appropriate period controls are included. We also hope to exhibit in this study the types of analysis possible with only repeated consumption surveys (a point made clear in the appendix). However we do note that our approach will overstate the real expenditure declines as a result of the 1997 financial crisis. Despite the use of a food price deflator, our summary findings are qualitatively similar to other studies documenting the impacts of the crisis. We observe a greater decline in consumption in urban areas as opposed to rural (33 per cent versus 26 per cent). Frankenberg et al. (1999) find a similar sectoral difference with a measured 34 per cent decline in per capita expenditure in urban areas and 18 per cent in rural over the single year period The detrimental impacts of the crisis are also apparent in the proportion of household expenditures devoted to food, another common welfare measure. The food share declines over the period from 68 per cent to 62 per cent of total household expenditures. This decline is partly due to the decreasing mean food shares within urban and rural areas as well as the increasing proportion of the population living in cities. However, given the rise in relative food prices and fall in real income as a result of the crisis, the national food share returns to 68 per cent in The proportional rise in the food share is greater for urban households, from 55 per cent to 62 per cent. Unlike real expenditures, the magnitude of change in this welfare measure is not dependent on the particular choice of price deflator. Although Table 1 reports changes in summary measures of mean household welfare, we are mainly concerned with the welfare of households towards the bottom of the distribution, particularly households deemed poor. The poverty determination methods adopted here define poor households as those households unable to afford a basic consumption bundle which, while also reflecting prevailing notions of taste, ensures adequate nutrition as well as a necessary amount of non-food expenditures. This approach is generally termed the cost-ofbasic-needs approach and the relative merits of this approach are discussed in Ravallion and Bidani (1994). The method used here is, in many ways, a refinement and adaptation of work developed by Ravallion (1994) and Bidani and Ravallion (1993). The approach involves the estimation of the total cost for a bundle of basic food goods as well as basic non-food 6

10 goods typically utilizing direct observations of price. The method adopted here enables poverty computations without direct information on prices but instead uses a simple model of consumer choice to impute prices from unit values. A household is deemed poor if its per capita expenditure lies below a fixed poverty line. As a check on the robustness of any results, three different poverty lines representing different levels of welfare are in fact determined and used in the analysis. The poverty line methodology is explained in detail in the appendix but the general approach is summarized as follows: a nutritionally adequate food bundle (with nutritional guidelines stipulated by WHO et al. 1985) that reflects the actual consumption choices of Indonesian households is determined and then priced. To ensure time consistent welfare comparisons the food bundle is fixed and applied to each survey year. The total cost of this bundle represents one poverty line termed the food poverty line. The food poverty line can then be scaled upwards by an econometrically estimated factor that represents the cost of essential non-food goods. Two such scale factors are utilized, one more generous than the other. Thus these final values, which we term the lower and upper poverty lines, proxy the total cost of essential food and non-food consumption needs. Due to important differences in relative prices between urban and rural areas, poverty lines are computed separately for each area. Poverty lines can also be determined with national mean prices or with more local provincial prices. We have estimated poverty lines from both types of price data as a check on the robustness of our findings. Since the results from the subsequent analysis do not appreciably differ if local or national prices are used, we only present the results with poverty estimates based on local prices since they will more accurately reflect local conditions. After the determination of a particular poverty line we then use the class of Foster-Greer-Thorbecke poverty measures to assess poverty. In particular we will use the headcount index, the poverty gap, and the squared gap measure. These measures are also described in the appendix. To give some sense of the precision of the poverty estimates, bootstrapped standard errors will be reported alongside some of the poverty measures in the analysis to follow.7 Table 2 and Figure 1 present national trends in the overall poverty measures. As is readily apparent, Indonesia has indeed experienced broad gains in poverty reduction over the 12-year period Table 2 contains the values of all three poverty measures (the headcount, poverty gap, and squared gap measures) calculated at each poverty line (the food line, the lower, and the upper) for each of the six survey years. The national poverty headcount, as 7 Since SUSENAS has a clustered survey design, the bootstrapped standard errors are calculated by drawing random samples of clusters with replacement. For each cluster selected, all households are used in the error calculation. As noted in Deaton and Paxson (1998), failure to recognize the clustered design of the survey data will result in an understatement of sampling variability. 7

11 measured by the upper poverty line, declined 61 per cent from 1984 to 1996, while the lower poverty line national head count posted even greater declines of 71 per cent. While Indonesia made significant gains in reducing the proportion of population living in poverty, it made even greater gains in reducing the severity of poverty, with the squared gap measure declining by more than 80 per cent over the period. To give some sense of the precision of these estimates, Table 2 also lists the estimated standard errors for the upper poverty line headcount measure. As is quite apparent by the relatively small standard errors, the headcount measures are all precisely estimated and the year-on-year changes in poverty are statistically significant at standard significance levels. Table 2: Summary national poverty measures, Poverty Line Poverty Measure Total Urban Rural Total Urban Rural Total Urban Rural Upper Poverty Line Lower Poverty Line Food Poverty Line Headcount Standard error Poverty gap Squared gap Headcount Poverty gap Squared gap Headcount Poverty gap Squared gap Poverty Line Poverty Measure Total Urban Rural Total Urban Rural Total Urban Rural Upper Poverty Line Lower Poverty Line Food Poverty Line Headcount Standard error Poverty gap Squared gap Headcount Poverty gap Squared gap Headcount Poverty gap Squared gap Source: Author s calculations from SUSENAS surveys, various rounds. Broadbased gains in poverty reduction were found in both rural and urban areas. The greatest poverty reductions were witnessed in rural areas with the headcount measure based on the 8

12 Figure 1: Overall poverty trends in Indonesia, various poverty lines National poverty headcounts, various poverty lines Poverty headcount (% of population) Food poverty line Lower poverty line Upper poverty line Year Urban poverty headcounts, various poverty lines Poverty headcount (% of population) Food poverty line Lower poverty line Upper poverty line Year Rural poverty headcounts, various poverty lines Poverty headcount (% of population) Food poverty line Lower poverty line Upper poverty line Year 9

13 upper poverty line declining by 57 per cent and the squared gap measure falling by 81 per cent. Similar to the national figures, not only did rural Indonesia experience large declines in the incidence of poverty, but the severity of poverty, as conveyed by the squared gap measure, fell by an even greater amount. The story is slightly different in urban areas as poverty does not decline monotonically over time. Indeed most urban poverty measures post a slight increase over the 1987 to 1990 period.8 In terms of the timing of poverty reduction, the greatest gains were reported over the period. There is some fear that SUSENAS underreports consumption (van de Walle 1988), and this may be especially true for the 1984 wave. Inspecting the underlying consumption baskets across the years, it is clear that the reported consumption of one of the rice varieties is substantially less in 1984 than in all subsequent periods. If the 1984 SUSENAS does indeed underreport consumption then the 1984 poverty measures may be overestimated. It is not immediately clear what can be done to correct for such possible consumption underestimation without further information on survey implementation or consumption patterns. As such, we report the numbers without correction. However subsequent multivariate analysis will include a vector of time period dummy variables that should absorb any year-to-year variation in poverty measures due to idiosyncrasies in survey implementation. After the gains in poverty reduction from , the increase in poverty as a result of financial crisis is severe and abrupt. We estimate increases in poverty headcounts on the order of 116 per cent when using the upper poverty line, 155 per cent with the lower poverty line, and 239 per cent with the food poverty line (albeit the food poverty line increase starts from a low base). The gap and squared gap measures, more sensitive to distributions among the poor, show even greater increases thus indicating an increased mass of households at the very tail end of the expenditure distribution. As previously discussed, the measured magnitude of these poverty changes depends on our choice of an all-food price deflator. Since food prices rose more rapidly than non-food prices, and even the poorest of households consume some nonfood items, these poverty change measures surely overstate the actual change in poverty at 8 Even though each poverty measure determined at each poverty line records the same general decline (or increase) in poverty, we look into whether another arbitrary poverty line or poverty measure might convey a different result by estimating the successive cumulative distribution functions for household consumption (results not shown). These results confirm that there will be no reversals in estimated poverty change if any arbitrary poverty line is adopted. We find that the 1996 consumption CDF stochastically dominates the 1993 CDF, as 1993 dominates 1990, and so on, at any point the CDF for 1996 lies below that for 1993, as 1993 lies below That is, a combination of any arbitrary poverty line and measure will record the same general decline in poverty for ; see Foster and Shorrocks (1988) for a discussion of stochastic dominance and poverty measures. Of course these gains are reversed by the financial crisis where the CDF for 1999 almost coincides with the CDF from the earliest period, Again, a deflator with a non-food component would not have yielded quite this extreme a change in consumption even though the drop in consumption would still be severe. Similar analysis conducted separately for urban and rural areas confirms that the higher poverty rates observed in urban areas in 1990 than 1987 would have been found with any poverty line or measure. 10

14 least to some extent. As a point of comparison, Suryahadi et al. (2000) calculate the increase in national poverty headcounts to be on the order of 57 per cent to 129 per cent depending on the exact type of deflator used. Regardless of the exact magnitude of the poverty increase, it is clear that the impacts of the crisis do not fall equally across urban and rural areas. For example the headcount measure based on the upper poverty line increases 189 per cent for urban households and 103 per cent for rural households. The difference in the increase in the squared gap measure is even greater. These differential changes are consistent with other studies. Friedman and Levinsohn (forthcoming) predict that the urban poor would be especially affected by the crisis and Frankenberg et al. (1999) have indeed found this to be the case. Clearly there are important distinctions to be made among the urban and rural poor. Even within urban or rural areas, there is significant variation in the incidence of poverty across the different Indonesian regions. Table 3 presents the regional poverty profiles for the survey years 1987 and 1993, two years in the middle of a period of sustained high national growth. Reported in this table are both the upper poverty line headcounts for each provincial rural/urban cell, as well as the Gini coefficient, in order to give a sense of the extent of variation in regional poverty and regional inequality. Within urban and rural areas, poverty levels are quite varied. The capital Jakarta has the lowest poverty headcount in both years whereas cities in both West and East Nusa Tenggara (a collection of islands east of Bali) tend to have the highest poverty incidence. Poverty levels overall are higher in rural areas but still varied across Indonesia. Some of the lowest rural poverty in both years is found in the Sumatran province of Jambi and some of the highest in the remote island of Irian Jaya as well as the islands of Nusa Tenggara. A cursory inspection across the two years will also confirm a good deal of heterogeneity in the change of poverty incidence. In most regions poverty decreases, with the rural areas of Java and Bali experiencing the largest reduction in poverty. Nevertheless, a handful of regions, such as rural South Sumatra actually post an increase in poverty incidence. In regards to inequality, the regional Gini coefficient is generally lower in rural areas. Since real income is also lower in rural areas, the combination of low mean income and low inequality necessarily implies higher poverty levels in rural regions. Nevertheless there is also a good deal of regional variation in inequality Gini coefficients in 1987 range from.25 to.35 in urban areas and from.21 to.31 in rural areas. Temporal trends in regional inequality are harder to discern from this table, although inequality does appear to be increasing for most urban areas and decreasing for rural ones. These trends will be explored in a more comprehensive fashion in the next section. 11

15 Table 3: Headcount poverty estimates at the upper poverty line and Gini coefficients, by province 12 Urban Rural Province Poverty count Gini coefficient Poverty count Gini coefficient Poverty count Gini coefficient Poverty count Gini coefficient Aceh N. Sumatra W. Sumatra Riau Jambi S. Sumatra Bengkulu Lampung Jakarta W. Java C. Java Yogyakarta E. Java Bali W. Nusa Tenggara E. Nusa Tenggara W. Kalimantan C. Kalimantan S. Kalimantan E. Kalimantan N. Sulawesi C. Sulawesi S. Sulawesi SE. Sulawesi Maluku Irian Jaya Source: SUSENAS 1987 and

16 3 Poverty change and economic growth Having documented Indonesia s gains in poverty reduction over and its reversal from we now turn to how these poverty changes covary with income growth. Several previous studies cited in the introduction have found a significant positive association between poverty reduction and growth in cross-national studies and, thus, they conclude that overall growth benefits even the very poor. This section of the paper explores the same topic. However instead of using national variation in poverty and income growth to trace out any association between poverty change and growth, this section will look within one country and utilize regional variation to identify the association between poverty change and income growth at the local level. For a given poverty line and initial poverty level, the growth and poverty relationship will be determined by how changes in inequality and gains in overall income levels covary over time. These time paths of inequality and income can be quite different across the different regions of Indonesia, given the diversity in sectoral composition of economic activity and in initial provincial conditions. To explore in a descriptive and flexible manner how the growth-poverty relation may vary across regions, we plot kernel density estimates of the log of household per capita expenditure (PCE) in each survey year separately for each provincial urban/rural cell. The resulting cell groupings of density estimates were quite varied. For expositional purposes we present the density estimates for two such cells: rural Bali and urban Central Kalimantan. Figure 2 presents the per capita expenditure densities for rural Bali. Each year of observation is plotted and three years are labeled: 1984, 1996, and For rural Bali, the results of high growth from are apparent in the rightward shift of the density plots over time. The fact that the expenditure density maintains its rough shape as it shifts to the right indicates that expenditure distributions in Bali have been fairly consistent over time. The general distributional shape is also maintained after the crisis, indicating that inequality has been left relatively unchanged by the crisis. The exact magnitude of the leftward shift of the 1999 density depends of course on the choice of deflator (which is here again a food price deflator). The story revealed in Figure 3, for urban Central Kalimantan, is quite different. In this cell, growth appears to occur simultaneously with an increase in inequality as the density plots shift rightward over time from 1984 to 1996 but also flatten out, thus increasing the density in both tails. The growth that occurred in this cell has very different distributional implications than the type of growth observed in rural Bali. Furthermore the financial crisis not only results in a leftward shift of the density but also a contraction of the right tail. The distribution in 1999 appears very similar to that for 1984 and so another consequence of the crisis, besides the income decline, is a decline in inequality. 13

17 Figure 2: Density plots of per capita household consumption rural Bali, density: lpcexp density: lpcexp density: lpcexp density: lpcexp Density Log Per Capita Household Expenditures (1984 rupiahs) PDF of cell pcexp Figure 3: Density plots of per capita household consumption urban central Kalimantan, density: lpcexp density: lpcexp density: lpcexp density: lpcexp Density Log Per Capita Household Expenditures(1984 rupiahs) PDF of cell pcexp 14

18 The heterogeneity in regional growth and inequality change suggested by the province specific density plots is summarized in Figures 4 and 5, which portray the magnitude of growth and inequality change for each province in the data. Figure 4 depicts the proportional change in mean regional PCE over two periods the growth period of , and the contractionary period for each provincial urban/rural cell. For expositional ease, provinces are ordered from west to east and the major island groups to which they belong are indicated on the horizontal axis. The regional diversity in the provincial growth experience, in either period, is very apparent. Most provincial rural-urban areas gained in mean PCE from , especially rural areas in Java and Lampung (the southernmost Sumatran province close to Java). However even in this period of national growth, the restive eastern most and western most provinces of Aceh and Irian Jaya actually experienced drops in mean PCE. The severe consequences of the financial crisis suggested by the density plots are also apparent in Figure 4 where every region experiences a drop in mean PCE, often of a magnitude at least as great as the gains in PCE over the preceding 12 years. Again, the magnitude of this loss is far from uniform. Urban areas generally experienced greater declines in mean PCE than their rural counterparts although the reverse is the case for the eastern most provinces of Irian Jaya, Maluku, and Southeast Sulawesi where rural areas appear to have suffered a greater proportional decline in income. Given the diversity of change in regional inequality (measured as the proportional change in the Gini coefficient) apparent in Figure 5, fewer generalizations can be made for either the growth or contractionary periods. In the earlier period, a greater number of urban regions witnessed rising inequality than rural regions, with the greatest increase in inequality experienced by the capital Jakarta. Other regions, such as the rest of urban Java, saw little change in inequality in either direction. Over the crisis period, the vast majority of regions in both rural and urban areas experienced a decline in inequality with the magnitude of this change in certain regions greater than 20 per cent. Thus not only did the crisis negatively impact overall income, but this decline was not distributionally neutral for most regions the crisis disproportionately affected the better off households consequently reducing inequality as well as income. In terms of income and inequality comovements, changes in regional income and inequality are positively correlated in both periods, especially over the period (a correlation coefficient of.40 compared with a coefficient of.14 for the period). As we have seen, however, these summary measures mask a great deal of underlying regional heterogeneity. Having described how regional income and inequality vary (and covary), we turn now to parameterized estimates of the poverty growth relationship as we look at regressions of changes in poverty on changes in various income measures. We will return to the regional 15

19 heterogeneity suggested in Figures 3-6 soon after. We first estimate a simple econometric specification relating poverty change to income change with the following expression: t + 1, t ln Pα, i = γ 0 + γ 1 ln µ t+ 1, t i + f p + e t+ 1, t i where lnp α is the change in the natural log poverty measure α for region i, lnµ i is the change in mean real income for region i (here nominal income is once again deflated by the food poverty line as in the previous section), and f p a vector of time period dummies. These difference regressions are estimated separately for rural and urban areas as well as jointly on the pooled sample. The coefficient γ 1 yields what we can term the gross effect of income growth on poverty change since there is no control for changes in regional inequality. It simply conveys the association between poverty change and mean income change net of period intercept effects. A second specification specifically controlling for changes in regional inequality is given by the following: ln P t+ 1, t ' ' t+ 1, t ' α, i = γ 0 + γ 1 ln µ i + γ 2 ln G t+ 1, t i + f p + e t+ 1, t i where lng i is the natural log of some inequality measure, here taken to be the standard Gini coefficient used in the earlier figures and tables.9 In this specification γ 1 yields what we will term the net effect of income growth on poverty change since it can be interpreted as the estimated association between distributionally neutral growth and poverty measures, i.e. the effect of income growth net of changes in inequality. γ 2 yields the impact of inequality change on poverty while holding income constant. We also estimate a third specification that includes the initial levels of regional inequality and regional mean income. Since the poverty growth elasticity is determined by the magnitude of changes in mean income and the shape of the income distribution, as well as the location of the poverty line, the poverty growth response may vary over time, or across regions, partly due to the initial conditions of the region. Unless each regional cell has the same average income and distributional shape, and the kernel density plots have shown this not to be the case, then even distributionally neutral growth will yield poverty growth elasticities that vary across regions. Put another way, the density of the distribution around the poverty line at the start of a period may be a significant factor influencing the poverty growth elasticity. Therefore we also adopt a third specification that includes the initial period mean income µ i 9 An alternative inequality measure, the variance of log income, was also used in this analysis with little impact on the overall results. For brevity s sake, only results with the Gini coefficient will be reported. 16

20 and inequality G i of the distribution in order to investigate whether regional initial conditions impact the poverty growth elasticity: ln P t+ 1, t '' '' t+ 1, t '' t+ 1, t '' t '' α, i = γ 0 + γ 1 ln µ i + γ 2 ln Gi + γ 3 ln µ i + γ 4 ln G t i + f p + e t+ 1, t i Figure 4: Proportional change in real mean per capita household expenditures, by province and Urban Areas.5 Proportional change in mean PCE Sumatra Java Bali, NT Kalimantan Sulawesi Maluku, Irian Jaya Rural Areas.5 Proportionate change in mean PCE Sumatra Java Bali, NT Kalimantan Sulawesi Maluku, Irian Jaya

21 Figure 5: Proportional change in inequality (Gini coefficient), by province and 1996 Urban Areas.2 Proportional change in inequality Sumatra Java Bali, NT Kalimantan Sulawesi Maluku, Irian Jaya Rural Areas.2 Proportional change in inequality Sumatra Java Bali, NT Kalimantan Sulawesi Maluku, Irian Jaya

22 Table 4: Difference regressions, poverty change on mean income and inequality change, various specifications, local prices Poverty Gross effect Net effect of growth Net effect of growth with initial conditions measure Growth Growth Inequality change Growth Inequality change Base income Base inequality Total sample Coef. S.E. Coef. S.E. Coef. S.E. Coef. S.E. Coef. S.E. Coef. S.E. Coef. S.E. Head count upper Head count lower Gap upper Gap lower Square gap upper Square gap lower Urban areas Head count upper Head count lower Gap upper Gap lower Square gap upper Square gap lower Rural areas Head count upper Head count lower Gap upper Gap lower Square gap upper Square gap lower Note: Estimates from Feasible Generalized Least Squares. N=255 for total sample estimates, 130 for urban, and 125 for rural estimates Source: Author s estimates from SUSENAS surveys, various rounds. 19